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The consequences of higher employer’s national insurance contributions

Written by admin on . Posted in Employment Tax, National Insurance Contributions. No Comments on The consequences of higher employer’s national insurance contributions

The impact of the Budget’s increases in national insurance contributions (NICs) are not limited to employers.

There were three main changes to employer’s NICs announced in the Budget, all of which will take effect from April 2025:

  • The secondary threshold – the starting point for payment of employers’ NICs – will be cut from £9,100 to £5,000. The employee’s starting point remains at £12,570.
  • The employer’s NICs rate will rise from 13.8% to 15.0%.
  • The employment allowance, effectively an employer’s NIC credit, will be increased from £5,000 to £10,500.

The cut in the secondary threshold is the biggest revenue raiser and the change provoking the most complaints from businesses in the retail, leisure and hospitality sectors. It is easy to see why. The NICs cost of employing a part-timer earning £175 a week goes up from nil to £11.85 a week. That is before the 6.7% increase in the national living wage kicks in (or the double-digit increases for under-21s on the national minimum wage).

The Office for Budget Responsibility (OBR) anticipates that employers will react in a variety of ways, including restricting future pay rises, reducing hours and cutting back on recruitment. There may also be a rise in self-employment (where the maximum total NICs rate is now 6%) and individuals working through one-person companies, although this is a contentious area. The line between a contractor and an employee has seen plenty of legislation and litigation over recent years.

If you are already self-employed, then on purely tax grounds, the appeal of incorporating has been reduced by the rise in NICs. It had already been weakened by increased tax on dividends, which are now in many instances a more costly way for an owner-director to draw profits out of a company rather than taking a bonus.

If you are an employee, then one indirect benefit you may see because of the NICs rise is the introduction (or improvement) of salary sacrifice schemes for pension contributions and, possibly, electric company cars. Both can save the employer NICs, part of which is often passed on to the employee.

More detail on the change to employer’s NICs can be found here.

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Double hit for employers

Written by admin on . Posted in Employment Tax, National Insurance Contributions, National Living Wage, National Minimum Wage. No Comments on Double hit for employers

The October Budget was not particularly kind to employers, with the cost of employer national insurance contributions (NICs) going up substantially from April 2025, combined with inflation-busting increases to the National Living/Minimum Wage.

Employer NICs

From 6 April 2025, the rate of employer NICs will increase from 13.8% to 15%, and the starting annual threshold will be lower at £5,000 (it is currently £9,100). For example, for someone employed on £50,000 per annum, the employer NIC cost will be just over £1,100 higher for 2025/26:

  • The increased 15% rate will also hit employers if they provide taxable benefits, such as medical cover, to employees.
  • The £5,000 threshold will stay in place until 5 April 2028. The threshold reduction will have a disproportionate impact on employers with a large number of low earners.

On the plus side – especially for smaller employers – the employment allowance is being increased from £5,000 to £10,500. Currently, this allowance is not available where employer NICs were £100,000 or more in the previous tax year. This restriction will be removed.

Although four full-time workers on the National Living Wage can be employed without any NIC cost for the employer, the changes are likely to see employers being increasingly careful with their recruitment policies.

National Minimum/Living Wage

Minimum wage rates will see substantial increases from 1 April 2025, with younger workers and apprentices benefiting the most:

  • For those aged over 21 and over, the hourly rate will go up by 6.7% to £12.21.
  • For 18- to 20-year-olds, there is a 16.3% increase to £10.00.
  • For apprentices and those under 18, the increase to £7.55 represents an 18% hike.

This follows similarly high increases in April 2024. Employees will welcome the uplift, but many employers will struggle with the additional cost; especially those in the hospitality sector. For full-time employees aged 21 and over, the increase is worth £1,400 a year. For 18- to 20-year-olds, the annual benefit is potentially worth over £2,500.

The rates of National Minimum/Living Wage can be found here.

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The Autumn Budget – a brave new tax world

Written by admin on . Posted in Budget, Capital Gains Tax, Corporation Tax, Income Tax, Inheritance Tax, National Insurance Contributions. No Comments on The Autumn Budget – a brave new tax world

Chancellor Rachel Reeves’ first Budget was a significant one in all senses.

“…this Budget delivers a large, sustained increase in spending, taxation, and borrowing.”

So said the Office for Budget Responsibility (OBR) in the first paragraph of its overview of the Autumn Budget. The numbers are indeed large:

  • spending is up by almost £70 billion a year over the next five years;
  • taxation will rise by £36 billion a year; and
  • borrowing will still be above £70 billion a year in 2029/30.

The Chancellor’s tax-raising opportunities were constrained by the Labour manifesto pledges to hold the rates of income tax, VAT, corporation tax and national insurance contributions (NICs) – only for employees, although other interpretations are available. The result was that other taxes had to carry the burden of providing extra funds for the Treasury:

  • Over half the additional revenue came from changes to employer’s NICs from 2025/26. These saw the class 1 employer rate rise from 13.8% to 15.0%, and the starting point for payments fall from £9,100 of annual earnings to £5,000. The impact of this was mitigated slightly by a £5,500 increase to £10,500 in the employment allowance – effectively an employer NIC credit.
  • The main capital gains tax rates have increased from 10% to 18% (for non-taxpayers and basic rate taxpayers) and from 20% to 24% (for higher and additional rate taxpayers). The rate for business assets disposal relief will rise from 10% to 14% in 2025/26 and then 18% in the following tax year, with the maximum amount of lifetime relievable gain staying at £1 million.
  • Inheritance tax (IHT) relief for businesses and agricultural property will be cut back from April 2026, with the relief for qualifying shares listed on the Alternative Investment Market halved to 50%.
  • Death benefits from pensions will be brought into IHT from 2027/28, although there were none of the other tax changes that had been rumoured in the weeks before the Budget. Notably full income tax relief on contributions remains and employer contributions continue to be free of NICs.

If you could be affected by any of these changes (or further changes not mentioned in this update), make sure that you seek advice. The sooner you are prepared for this new, higher tax environment, the better.

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Tips and troncs – what does it mean for your business?

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Since July, it has been illegal for employers to withhold tips from staff. The payment of tips will probably result in a national insurance contribution (NIC) cost for both employer and employees, but this extra cost can be circumvented if a tronc arrangement is used to distribute tips.

The new legislation applies mainly to those operating in the hospitality sector, and covers all tips, gratuities and service charges. It also brings the law into line with modern payment practices as it covers tips left via card payment.

NICs

Tips paid to employees are subject to both income tax and employee NICs. The NIC cost is at a rate of 8% where tips – when added to normal earnings – fall between £1,048 and £4,189 monthly. Employers pay NICs once a monthly threshold of £758 is reached, although their liability is normally reduced by the annual £5,000 employment allowance.

For example, if a restaurant pays out £25,000 worth of tips, the employer will probably be facing an additional NIC cost of nearly £3,500. The cost for the staff could be up to £2,000. This is where a tronc arrangement comes into play.

Troncs

A tronc is an arrangement used to distribute tips. It is run by a troncmaster.

Provided it is the troncmaster who decides how tips are to be distributed among staff, there are no employee or employer NICs on amounts paid out. It is still possible, however, for the tips to be included on the employer’s payroll.

The troncmaster will typically be a member of staff, although larger businesses might prefer to use the services of a specialist provider. There is no problem if the employer makes the decision on who to appoint as troncmaster; what is important is that the employer plays no part, directly or indirectly, in the allocation of tips.

HMRC’s detailed guidance on tips, gratuities, service charges and troncs can be found here.

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Class 4 NIC reductions benefit the self-employed

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Self-employed workers will see a substantial reduction in their Class 4 national in announced in the 202surance contributions (NICs) for the current tax year after two percentage cuts were 3 Autumn Statement and 2024 March Budget.

Maximum saving

Class 4 NICs are earnings-related with the main rate paid on profits between £12,570 and £50,270. For 2023/24, the main rate was 9%, but for 2024/25, it is reduced to 6% – representing a maximum saving of £1,131. Add to that:

  • Self-employed people with profits of £6,725 or more no longer pay £179 of Class 2 NICs with potential savings of £1,310 compared to last year.
  • A husband-and-wife partnership could benefit to the tune of £2,620.

The additional rate of Class 4 NICs on profits in excess of £50,270 is 2% and this rate is unchanged from 2023/24.

However, there can be less tax saving for business investment for 2024/25. Buying a new laptop for £1,500, for example, would have saved a basic rate taxpayer £435 last year, but the tax saving is now £390.

Lower profits

Those who are self-employed with profits of less than £50,270 will see the following reductions to their total NIC liability:

Profit 2024/25 NICs Reduction
£15,000    £146 £232
£25,000    £746 £552
£35,000 £1,346 £852
£45,000 £1,946 £1,152

Tax thresholds

NICs cannot, of course, be considered in isolation. The personal allowance and basic rate income tax thresholds remain frozen at 2021 levels with the NIC reductions insufficient to offset fiscal drag.

However, for Class 4 NIC purposes, it has been beneficial to have the main rate threshold frozen at £50,270. If it had been increased to, for example, £60,000, the self-employed would be paying 6% – rather than the 2% additional rate – on a further £9,730 of profits.

A House of Commons explainer on fiscal drag gives a summary of the points here.

The 2024 Budget factsheet explaining the changes can be found here.

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Not in the NIC of time

Written by admin on . Posted in National Insurance Contributions, Pensioners, Pensions, self-assessment, Self-Employed. No Comments on Not in the NIC of time

A useful new web tool has emerged, a little late in the game, in a joint effort from two government departments.

In early 2023, HMRC and the Department for Work and Pensions (DWP) found they were unable to cope with the volume generated by a 5 April cut-off date that had been set a decade previously. The deadline related to the option to pay backdated National Insurance contributions (NICs) to fill in gaps in contribution records going back to 2006/7, rather than the standard six-year period. Media coverage of the option – often quoting the more extreme examples of benefit – had prompted a surge of last-minute interest, which the departments were unable to manage.

After denying there was a problem, the government finally revealed a band-aid solution in March, pushing the deadline out to 31 July 2023. This solution came unstuck about three months later when, still unable to cope with requests for information, the deadline was extended again to 5 April 2025 – two years after the original cut-off date.

One of the biggest issues causing delays was the difficulty in obtaining details of contribution gaps from the DWP (unavailable online) and then paying HMRC the appropriate amount. Now, at long last, a ‘fully end-to-end digital solution’ has been launched by the DWP and HMRC under the banner Check your State Pension forecast. It is not a complete solution, because it will not work if you are beyond the State pension age (presently 66 years), self-employed or currently living outside the UK with gaps incurred while working abroad. You will also need to have a Personal Tax Account with HMRC to log in (or register for one first with GOV.UK).

If you think you might have missed contributions going back to April 2006, it is well worth taking a few minutes to check your position with the new tool. To fill in one year’s missing contribution (before the 2023/24 tax years) costs £824.20 and could mean an extra £328.64 a year in State pension.

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Electric vehicles can boost income with salary sacrifice

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It may seem counter-intuitive, but taking a pay cut and opting for a salary sacrifice scheme with an electric car can boost take-home pay thanks to tax and national insurance contribution (NIC) savings.

Salary sacrifice

Despite the recent introduction of the Government’s zero emission vehicle mandate, the number of electric car sales seems to have stalled recently.

Electric cars work well as part of a salary sacrifice scheme because the taxable benefit for employees is low. It is calculated as just 2% of the car’s list price. This percentage is to increase by 1% for each of the next three tax years but will still be a fairly reasonable 5% by 2027/28.

However, it is important to note that while hybrid cars can have the same tax advantage, the electric range for the majority of models is too low to qualify for the 2% rate. The current percentage for most hybrids will be a less attractive 12%.

High marginal tax rates

With tax thresholds frozen, more and more employees are facing higher marginal tax rates. In particular, a rate of 60% applies on income between £100,000 and £125,140 due to the withdrawal of the personal allowance:

  • For example, an employee earning £125,000 might sacrifice £10,000 of their gross earnings, with the employer then providing an electric car worth £40,000. The employer’s leasing arrangements will typically cover the full costs of running the car.
  • The employee’s tax and NIC bill will be reduced by £6,200, although they will have to pay tax of £480 on the benefit of having the company car.
  • However, if the employee had leased the car personally, it would take almost £26,000 of their gross pay to cover similar leasing costs.

From the employer’s perspective, an electric car salary sacrifice arrangement could help boost staff retention, as well as attracting new staff.

A basic guide to salary sacrifice for employers can be found here.

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National Insurance Cut

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Employee National Insurance cut announced in the Autumn Statement takes effect (from 6 January).

For many years, successive governments have been happy for the public to vaguely believe that national insurance contributions (NICs) are building up in some national benefit fund, rather than representing just another tax on income. While something called the National Insurance Fund does exist, as a House of Commons Library briefing noted back in 2019, “The Fund operates on a ‘pay as you go’ basis; broadly speaking, this year’s contributions pay for this year’s benefits.”

For politicians, the perceived difference between NICs and income tax made it possible to grab the headlines by reducing the basic rate of tax while receiving much less attention for maintaining or even increasing revenue by raising NICs.

Last November, the Chancellor appeared to have finally given up on the distinction-without-a-difference approach by proclaiming that his cuts to NICs for employees and the self-employed were tax cuts.

The changes

If you are an employee (but not a director, to whom special rules apply), the cut means your main NIC rate (on annual earnings between £12,570 and £50,270) fell from 12% to 10% from 6 January 2024. The extra amount in your pay packet is broadly the same as if a 2p cut had been made to basic rate tax (which covers the same £37,700 band of income). However, from the Chancellor’s viewpoint, the NICs cut was cheaper, as there was no ‘tax cut’ on pension or investment income, both of which are NIC-free.

The employer’s NIC rate did not change, remaining at 13.8% on all earnings above £9,100. If your earnings are below £50,270, the theoretical advantage of using salary sacrifice to pay pension contributions has been marginally reduced but remains attractive, as shown in the table below, based on a £1,000 sacrifice.

If you are among the growing band of higher or additional rate taxpayers, the financial advantage of salary sacrifice is unaltered. Either way, if you are not using salary sacrifice to pay pension contributions, it is still worth taking advice about the option. It is beneficial in most circumstances, but there are drawbacks to be aware of.

Personal contribution

 

 Salary sacrifice employer contribution (sacrificed amount + NIC saving)
Employee NIC rate 12% 10% 12% 10%
  £ £ £ £
Gross salary 1,000 1,000 Nil Nil
Employer pension contribution Nil Nil 1,138 1,138
Employer NIC   138 138 Nil Nil
Total employer outlay 1,138 1,138 1,138 1,138
Employee salary 1,000 1,000 Nil Nil
Less:

income tax

  

(200)

  

(200)
    Employee NICs    (120) (100)
Net pay = net pension contribution    680    700
Tax relief   170   175
Total pension contribution 850  875 1,138 1,138
Gain     33.9% 30.1%

 

Incoming NIC reforms for the self-employed

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National insurance contribution (NIC) changes for the self-employed announced in the Autumn Statement come in from 6 April 2024 and will be welcome news. But the reforms don’t go far enough to offset the continuing cost of frozen tax thresholds.

NICs classes

The self-employed currently pay two classes of NICs:

  • Class 2 NICs are at a flat weekly rate, and it is these contributions that give entitlement to contributory benefits, such as the state pension (35 qualifying years being required to receive a full pension). Class 2 NICs are deemed to be paid if profits are between £6,725 and £12,570, and can be paid voluntarily if profits are lower.
  • Class 4 NICs are earnings related. The main rate of 9% is paid on profits between £12,570 and £50,270, with an additional rate of 2% on profits in excess of £50,270.


Class 2 voluntary only

From 6 April 2024, any self-employed person with profits of £6,725 or more will be entitled to contributory benefits without having to pay class 2 NICs – an annual saving of £179 for those who would otherwise have had to pay.

However, those with profits below £6,725, will still have to pay voluntarily if they wish to maintain access to contributory benefits.

Anyone with profits just below £6,725 might decide to forego claiming sufficient expenses to meet the income limit, although the overall tax impact of doing so must be considered.

Class 4 reduced

From the same date, the main rate of class 4 NICs will be reduced from 9% to 8%, representing a maximum annual saving of £377. The additional rate of 2% is unchanged.

There are also no changes to the thresholds of £12,570 and £50,270, although this will be beneficial for anyone with profits in excess of £50,270 – it means no increase to the amount of profits charged at the main rate rather than at the lower additional rate.

HMRC’s guide to voluntary national insurance can be found here.

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NIC changes from 6 April 2024 will be welcome news for the self-employed, although the reforms don’t go far enough to offset the continuing cost of frozen tax thresholds.

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Second Tax Day brings change and consultation

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The second ever Tax Administration and Maintenance Day (Tax Day) took place on 27 April, with the government publishing a range of technical proposals and consultations.

The Tax Day announcements were grouped around simplification and modernisation of the tax system, tackling the tax gap and general policy and administrative issues. A total of 23 technical tax updates were published, although only a few of them will be directly relevant to the average taxpayer.

Definite changes

National insurance credits: Some parents will not have received credits if they have not been claiming child benefit, mainly because of the impact of the High Income Child Benefit Charge. This affects future entitlement to the state pension, so the government is going to correct the problem on a retrospective basis.

Repayment agents: Some businesses specialising in making repayment claims from HMRC have been criticised due to the speculative nature of claims being made. From 2 August 2023, repayment agents must be registered with HMRC.

Consultations

A range of consultations were also announced on Tax Day, including:

  • How the Help to Save scheme might be simplified. The scheme, which offers a 50% government bonus for low-income savers, is set to run in its current form until April 2025. The government wants to encourage take-up in the target group.
  • Non-compliance with the off-payroll working rules can result in tax and national insurance contributions being paid twice on the same income – by the deemed employer and also by the personal service company. The government is looking at a potential change so that the tax paid by the personal service company can be set off against the duplicate liability payable by the deemed employer.
  • Umbrella companies are coming under further scrutiny, with initial replies to a 2021 consultation to be published shortly, alongside calls for options for additional regulation to tackle non-compliance.
  • Even though the Construction Industry Scheme has been reformed several times since its inception, some further changes are being considered. In particular, VAT could be added to the list of taxes to be taken into account when deciding whether a company qualifies for gross payment status.

A summary of the Tax Day announcements, along with links to the related consultations, can be found here.

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